Wednesday, November 24, 2004

As George Negus said in the introduction to the half-hour report on SBS Dateline:

When Australian medical entrepreneur Peter Osborne became involved with a representative of Johns Hopkins University in the United States and promoted a new online health care system for Australia with him, he thought his future looked rosy. Now, several years later he is facing financial ruin, governments in Australia have been misled and there are serious allegations of impropriety leveled against the project. SBS business reporter Peter Martin investigates a corporate intrigue that stretches across three continents.

Wednesday, November 03, 2004

Anyone serious about following Australian politics is about to have to become serious about understanding the economics of unfair dismissal. You wouldn't have guessed it during the election campaign. But now that the Government is back, we are told that one of its first moves will be to reintroduce into the Senate its oddly named Fair Dismissal Bill. It could happen this month.

But despite the claims made on both sides, its effects are more symbolic than real. The Fair Dismissal Bill exempts businesses from the need to act fairly when dismissing their workers; but only small businesses (employing fewer than 20 people) and only those covered by federal law. Most small businesses are covered by state laws. And many more are too small to have set themselves up as legal corporations and so are already exempt.

The Parliamentary Library estimates that only about 600,000 of Australia's 10 million-odd workers stand to be affected by the bill and, as it happens, those particular workers in their present jobs have nothing to fear. The provisions of the bill apply only to workers taken on after it becomes law.

So why do you need to bother brushing up on what economists have to say about unfair dismissal? Because with little concrete to debate, the bill's supporters and opponents are going to spend the next few weeks arguing about economic theory. And the theory most in contention will be the one that says that the easier employers find it to sack their workers, the more workers they will employ...
To the Government this is self-evident. The former employment minister, Tony Abbott, noted that if only one in 20 small businesses took on an extra worker as a result of the bill, it would create 50,000 new jobs - which is mathematically correct, but meaningless without knowing what the employers would actually do.

The Melbourne Institute attempted to help, with a government-commissioned report finding that 77,000 jobs would be created if unfair dismissal laws were removed, but it was based on an opinion poll rather than historical evidence.

The opponents of the bill, among them the Democrats senator Andrew Murray, argue flatly that there is no evidence whatsoever for the theory - which is also technically true, but then it is a very hard theory to prove.

Until a few years ago the economics profession didn't try. Instead it argued about unfair dismissal laws from first principles. Two competing principles were at stake. On the one hand the workers already in jobs ("insiders") should find their prospects for continued employment improved by unfair dismissal laws. Even during economic downturns. That would mean that, all other things being equal, unfair dismissal laws should make employment higher than it otherwise would be when the economy turned down.

On the other hand, potential workers not yet in jobs ("outsiders") should find their employment prospects diminished by the laws (because of the extra potential costs for employers involved in dismissing them should things not work out). This should be the case even when the economy is turning up. This means that, all other things being equal, unfair dismissal laws should make employment lower than it otherwise would have been when things were improving.

More jobs in the bad times and fewer in the good times mean a more stable pattern of employment, but that doesn't necessarily indicate anything about the average rate of employment over time. It could be either higher or lower with unfair dismissal laws than without.

In 1990 Edward Lazear from Chicago University decided to find out. In a ground-breaking study published in the Quarterly Journal of Economics he examined employment data and changes in dismissal laws for 20 countries over three decades. He found that introducing a requirement for severance pay typically cut a nation's employed workforce by 1 per cent. For the United States, this would mean a cut of more than a million jobs, if it decided to introduce unfair dismissal provisions. The finding stood for a decade, and was doubtless influential in the Coalition's decision to weaken Australia's national unfair dismissal laws shortly after taking office in 1996.

At about that time, the economist John Addison of the University of South Carolina began to voice doubts about Lazear's findings. He persuaded Lazear to hand him his original data and the programs he had used to arrive at his conclusions. After correcting the data for what he said were errors and using better methods to pool the data, he found that none of Lazear's findings survived as statistically significant.

The publication of Addison's study in 2000 unleashed a flood of other research which, taken together, provides a more sophisticated understanding of the effect of unfair dismissal provisions.

Most studies find that while smoothing fluctuations in employment, the provisions do cut average employment over time, but not always by very much, and not for all types of workers. Men of prime working age typically are not hurt at all. That's because they are usually the "insiders" who benefit from employment protection.

The losers are typically younger people trying to break into work and the long-term unemployed, who are seen as risky to take on. Unfair dismissal laws are typically found to increase the length of time that a long-term unemployed person stays out of work.

That's if they have any effect at all. Another strand of research suggests that "outsiders" looking for work simply bypass them. They work casually, or part-time, or for themselves, all situations where unfair dismissal provisions don't apply.

The economics profession is able to provide something for everyone in the debate that is about to engulf us. The former US president Harry Truman is once said to have asked for a one-armed economist after the two-armed variety had driven him to despair, advising him first on the one hand and then on the other.

The economists we have today are likely to say that yes, unfair dismissal provisions do tend to cost jobs, but no, they needn't cost very many of them.